Risk taking and risk management of insurance companies
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In my dissertation, I study risk-taking and risk management of insurance companies, by examining the effects of local religious beliefs on insurers’ risk-taking behaviors and the effects of Enterprise Risk Management (ERM) adoption on insurers’ cost of capital. My dissertation consists of two essays. In the first essay, I investigate whether the adoption of the ERM approach affects companies’ cost of equity capital. ERM is a process that manages all risks in an integrated, holistic fashion by controlling and coordinating offsetting risks across the enterprise. I restrict my analysis to the U.S. insurance industry to control for unobservable differences in business models and risk exposures across industries. I simultaneously model companies’ adoption of ERM and the effect of ERM on the cost of capital. I find that ERM adoption significantly reduces company’s cost of capital. My results suggest that cost of capital benefits are one answer to the question how ERM can create value. In the second essay of my dissertation, I empirically examine the effect of local religious beliefs measured by the fraction of Catholics (or the fraction of Protestants) living in a certain geographic region on risk-taking behaviors of insurer headquartered in that region. I find that annuity writers, more risky than life writers, are more common in high Catholic ratio or low Protestant ratio areas. Further, I employ three risk measures—asset risk, investment risk, and total risk—to proxy for insurers’ risk-taking activities. I find that insurance companies located in high Catholic-to-Protestant ratio, high Catholic ratio, or low Protestant ratio areas assume significantly more risk. Corporate risk-taking behaviors in the financial services sector has received increased attention from policymakers and regulators in the aftermath of the recent financial crisis, and my research contributes to the currently ongoing public policy discussion.